Hartalega’s 1QFY20 earnings to remain flat

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KUCHING: The normalised earnings of Hartalega Holdings Bhd’s (Hartalega) first quarter of financial year 2020 (1QFY20) will likely remain flattish as the group’s average selling price (ASP) is set to remain depressed in the near-term.

The research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) recapped that Hartalega recorded a weak 4QFY19 earnings which came in at RM91.4 million, which translated into a decline of 23.7 per cent quarter on quarter (q-o-q) and 21.7 per cent year on year (y-o-y).

“Moving forward, we are expecting 1QFY20 normalised earnings to come in between RM87 million to RM97 million which would account for about 20 per cent to 22 per cent of our full-year FY20 earnings forecast,” MIDF Research said.

“On a comparable basis, we view that 1QFY20 normalised earnings to remain stagnant on a q-o-q basis. This would also mean that on a y-o-y basis, we are expecting an earnings reduction of more than 22 per cent.”

MIDF Research anticipated the group’s ASP to remain depressed in the near-term that is, below RM100 per thousand pieces (versus 4QFY19 of RM96 per thousand pieces).

Despite the ‘cost-pass through’ practice in the glove industry, the research arm believed that the group was unable to fully pass through to its customers the higher cost of production during the last quarter which arose from the upward revision of gas tariff and minimum wage.

The research arm noted that this is largely due to the supply surplus of nitrile glove particularly in the first half of current year 2019 (1HCY19).

“Note that we are estimating a three per cent q-o-q increase in production cost which the group will have to absorb.”

Meanwhile, MIDF Research gathered that 2HCY19 is expected to be better in terms of supply-demand dynamic driven by industry players’ effort to regulate expansion.

Based on the research arm’s channel checks, the local glove manufacturers have delayed about six billion of planned capacity expansion in FY19 (about 30 per cent cut from the initial plan).

“Nonetheless, we believe that Hartalega would be in a difficult position to meaningfully increase its selling price as its bigger peers are aggressively expanding its nitrile glove manufacturing capacity. This would inadvertently lead to lower profit margin.”